Friday, April 30, 2010

The Greek debt crisis may be turning into a European Central Bank crisis.

As the European Central Bank (ECB) continues to loan money to keep Greece afloat, the ECB's exposure to the failing economy also grows, threatening potentially backbreaking losses if Greece declares bankruptcy. This is a looming concern as Germany lawmakers continue to balk at a bailout.

The extent of the financial assistance needed by Greece – with Spain and Portugal, both of which also saw their debt downgraded this week, now in similar positions – is placing unsustainable stress on the ECB, says Desmond Lachman, a former managing director at Salomon Smith Barney and current fellow at the American Enterprise Institute.

“What this has now become is a European Central Banking crisis,” says Mr. Lachman. “The main concern of [EU negotiators] is keeping this crisis from affecting the ECB, and whether continued default [in Spain and Portugal] would affect the bank.”

The ECB already holds tens of billions of dollars in Greek bonds. As it now stands, Greece will not be able to repay the bank for these bonds, let alone the bonds that the ECB continues to buy from Greece to keep it afloat as bailout negotiations continue. This is also the case with Spanish and Portuguese bonds, which the bank also holds.

The ECB has not commented on its exposure to these bonds. Governing Council member Axel Weber said Thursday that the impact of a Greek default would be "incalculable."

Major European exchanges fell more than 2.5 percent, and on Wall Street, the Dow Jones industrial average finished down more than 200 points. The euro slid more than 1 percent to nearly an eight-month low.

"We have the makings of a market crisis here," said Neil Mackinnon, global macro strategist at VTB Capital.

Greece is struggling with massive debt, and with prospects for economic growth weak it could end up in default. Its 15 eurozone partners and the International Monetary Fund have tried to calm the markets with a euro45 billion rescue package, but it hasn't worked.

Standard & Poor's warned that holders of Greek debt could take large losses in any restructuring, but a greater worry is that Greece's debt crisis is mushrooming to other debt-laden members of the eurozone.

Tuesday, April 27, 2010

Here is the primary risk of why frontloading the US Treasury with ultra-short holdings is just asking for a capital markets/liquidity/solvency/sovereign crisis. So far in April, the US Treasury has redeemed over $484 billion in Bills.That's nearly a half a trillion in mandatory cash outflows, interest payments aside. In April the cash out for interest expense will likely be one twentieth of this. What people don't realize is that the Treasury in April was down to just $9 billion in cash. Unless the UST can roll its debt not on a monthly but now weekly basis in greater and greater amounts, the interest rate doesn't matter. All it takes is one semi-failed auction and it's game over as hundreds of billions in bills become payable.

Recently, the Federal Reserve has significantly altered the procedures and goals that it had followed for decades. It has more than doubled its balance sheet, paid interest to banks on reserves held as deposits with the Fed, made decisions about which institutions to prop up and which should be allowed to fail, invested in assets that expose taxpayers to large losses, and raised questions about how it will avoid inflation despite an unprecedented increase in the monetary base.

We should document why the Fed took each step, what the expected results were, and whether those results were achieved. What is surprising is not that many congressional colleagues support Rep. Ron Paul's (R-TX) bill calling for an audit of the Fed. Remarkably, there is significant opposition to such oversight, and the political prospects for undertaking such an audit are relatively bleak.

This paper has three main sections. The first section looks at opposition to the audit. Although audit opponents express concern over keeping the monetary authority insulated from political pressure to inflate, one could argue that the larger threat to Fed independence comes from its departure from standard operating procedures. The second section looks at the processes on which an audit should focus. How did Fed officials undertake to determine whether this was primarily a liquidity crisis or primarily a solvency crisis? The third section looks at the outcomeson which an audit should focus. The profit or loss of the Fed's investments would provide a very helpful indicator of whether the Fed's actions served the economy as a whole or merely transferred wealth from ordinary taxpayers to bank shareholders.

This was an entirely logical response to the twisted events that are unfolding. The rescue obliges countries in trouble to go deeper into trouble. Portugal must come up with €774m as its share of the EU's initial €30bn package. Ireland must find €491m, Spain €3.7bn.

Yields on 10-year Portuguese bonds hit 4.94pc, a whisker shy of the 5pc rate that Lisbon must relend to Greece. Meanwhile, safe-haven Germany can borrow at just over 3pc. The bail-out cost falls hardest on those that can least afford it. It deepens the North-South divide that lies at the root of Europe's crisis.

In a rational world, Brussels would tap the EU's AAA rating to issue cheap "Barroso Bunds" to cover rescue costs. But we are not in a such a world. We are in the Maastricht madhouse, a currency union without a treasury, ruled by the "no bail-out" clause of Article 125 of the EU Treaties. Europe is at last paying the price for fudging the true implications of EMU 19 years ago in that Medieval city on the Maas, gambling that it would one day be able to lead Germany by the nose into a debt union.

Chancellor Angela Merkel continues to equivocate, demanding "very strict conditions". Dissent is growing louder in her coalition ranks. Both Free Democrats and Bavarian Social Christians have said it is time to break the taboo and ask whether Greece should "step outside" EMU. Werner Langen, the leader of Christian DemocratMEPs, said the bail-out appears to breach Germany's constitution.

The biggest bummer to arise from the allegations that the revered and feared Wall Street puppet master Goldman Sachs had played us all for patsies is this: the dial on the Wall Street capital-formation machine, the engine that was supposed to be the driving force of the greatest economic system on earth, was purposely set to junk — worthless, synthetic junk.

The civil fraud case the Securities and Exchange Commission filed in mid-April against Goldman is based on a single deal, called Abacus 2007-ac1. The investment bank created it so hedge funder John Paulson could line his pockets with cash when the value of American families' most prized asset crashed. But on Wall Street in the late aughts, polyester financing was in fashion everywhere.(See the winners and losers of Wall Street.)

Morgan Stanley had the so-called dead-Presidents deals, named Buchanan and Jackson. Another Morgan deal, one called Libertas, defrauded investors in the U.S. Virgin Islands, according to a lawsuit. JPMorgan Chase played procurer for Magnetar, a hedge fund so artful in profiting from the meltdown that Northwestern's Kellogg School of Management praised it last year in a case study. A firm run by Lewis Sachs, until recently a top Treasury Department adviser, and UBS, until recently a tax-cheat favorite, created junky bonds that investors who bought them now claim were going bad even before the deals were closed. Bank of America too is being sued for a deal that was set up by its Merrill Lynch subsidiary with a manager who is now under investigation by the SEC.

"Firms such as Citigroup and Merrill Lynch [and others] were able to create complex securities backed by recklessly underwritten [often fraudulent] mortgages, knowing that they could pass the risk along to someone else who had less information about the underlying loans. [The] $62 trillion credit derivatives market allowed Wall Street to lend without having confidence in the men and women it lent to. Wall Street hedged away the risk of lending and in the process undermined the entire system."

Monday, April 26, 2010

Gold's advance in 2010 has been helped by investors once again seeking refuge as worries over the fiscal health of Greece and other euro zone economies intensified. Demand has also been fuelled by anticipation of a pick-up in inflation following ultra loose monetary policy globally.

"We do think that gold equities will outperform gold itself," said Bradley George, head of commodities and resources at Investec Asset Management.

"We see a 10 to 15 percent upside in the gold price but we see more like 20 to 30 percent upside in the equity names because they're going to have an improving operating margin and we don't think the market has fully priced that in yet."

Gold prices could climb as high as $1,300 an ounce in 2010, driven by higher investment demand, according to metals consultancy GFMS Ltd.. The metal was trading at $1,138.55 on Friday.

My instinct is to call the proposed legislation a "blame deflection bill" rather than financial reform. But I admit that I have not read the whole bill. Has anyone?

My impression is that the following things are not in it.

1. No exit strategy from government support for subsidized, lenient mortgage credit. No curbs on Freddie and Fannie, whose market share has skyrocketed in the past year and a half. No increase in down payment requirements for FHA, which is in deep doo-doo.

2. No change to the role of credit rating agencies, as far as I know. It seems to me that one thing that everyone, left and right, can agree on is that the regulators outsourced their function to the credit rating agencies, and this worked out badly. As far as I know, the bill does not correct this flaw. Perhaps it tries to, but other provisions have gotten more attention.

3. Nothing to address the issue of "cognitive capture." The regulators will still get their analysis of the financial sector from the CEO's of the largest banks.

Finally--and this will get me in big trouble--I have to rant about the notion of a consumer financial protection agency. I know that it's axiomatic that poor people are helpless victims. But in the case of these mortgages, that is a really hard sell. The banks did not take from poor people. They gave to poor people. If you were lucky enough to get one of these exotic mortgages when house prices were still going up, then you got to reap a nice profit on your house. If you were not so lucky, you lost...close to nothing. I'm sorry, but if you borrowed up to 100 percent of the value of the house or more, then all you really lost were your moving expenses.

According to estimates by The Economist, foreign banks’ exposure to Greece, Portugal and Spain combined comes to €1.2 trillion. European banks have lent most of this. German banks alone account for almost a fifth of the total. (Table 2) Realizing failure to act risks a financial meltdown, German finance minister Wolfgang Chasuble pleaded with his people and told Der Spiegel that

"We cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers…Greece's debts are all in euros, but it isn't clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable."

I strongly recommend that the responsible congressional committees request and require all assistant secretaries at the US Treasury (and other relevant political appointees over whom they have jurisdiction) to appear before them early next week.

The question will be simple: Please share your calendar of meetings this weekend, and provide us with a complete accounting of people with whom you met and conversed formally and informally.

The finance ministers and central bank governors of the world are in Washington this weekend for the spring meetings of the International Monetary Fund. As is usual, the world’s megabanks are also in town in force, organizing big meetings and small dinners.

Through these meetings dutifully troop US treasury officials, providing in-depth and off-the-record briefings to investors.

Banks such as JP Morgan Chase and the other top tier financial players thus peddle influence, leverage their access, and generally show off. They accumulate information from a host of official contacts and discern which way policymakers – their “good friends” – are leaning.

And what is the megabank whisper mill working on? Ignore the “economic research” papers these banks put out; that is pure pantomime for clients-to-be-duped-later. I’m talking about what they are telling the market – communicated in specific, personal conversations this weekend.

They are telling people that, based on their inside knowledge, Greece and potentially other eurozone countries will default on their debt. Perhaps they are telling the truth and perhaps they are lying. Most likely they are – as always – talking their book.

But the question is not the substance of their whisper campaign this weekend, it is the flow of information. Have they received material non-public information from US government officials? Show me the calendar of the top 10 treasury people involved, and then we can talk about whom to summon from the private sector to testify – under oath – about what they were told or not told.

There is no question that the megabanks derive great power and enormous profit from their web of official contacts. We should reflect carefully on whether such private flows of information between governments and “too big to fail” banks are entirely suitable in today’s unstable financial world.

Large global banks make money, in part, through nontransparent manipulation of information – this is the heart of the SEC charges against Goldman Sachs. But the problem is much broader: the Wall Street-Washington corridor is alive and well on its way to another crisis that will empower, enrich, and embolden insiders (public and private) while impoverishing the rest of us.

The big players on Wall Street are powerful like never before – and they use this power to press for information and favors from sympathetic (or scared) government officials. The big banks also appear hell-bent on abusing that power. One consequence will be further destabilizing global financial markets – watch carefully what happens to Greece, Portugal, Ireland, and Spain at the beginning of next week.

It is time for Congress to step in with a full investigation of the exact flow of information and advice between our major megabanks and key treasury officials. Start by asking tough questions about exactly who exchanged what kind of specific, material, market-moving information with whom this weekend in Washington.

Have you driven a Ford lately? That might be a good idea, as it seems that GM's claims to have repaid its TARP loans in full and ahead of schedule are, well, bullshit. Sen. Charles Grassley (R-Iowa) has sent a letter to Treasury Secretary Tim Geithner pointing out that GM has apparently paid back its TARP money with...more TARP money. Here's some of Grassley's query:

During his testimony [Inspector General for TARP Neil] Barofsky addressed GM’s recent debt repayment activity, and stated that the funds GM is using to repay its TARP debt are not coming from GM earnings. Instead, GM seems to be using TARP funds from an escrow account at Treasury to make the debt repayments. The most recent quarterly report from the Office of the Special Inspector General for TARP says "The source of funds for these quarterly [debt] payments will be other TARP funds currently held in an escrow account."...

Therefore, it is unclear how GM and the Administration could have accurately announced yesterday that GM repaid its TARP loans in any meaningful way. In reality, it looks like GM merely used one source of TARP funds to repay another. The taxpayers are still on the hook...

The bottom line seems to be that the TARP loans were "repaid" with other TARP funds in a Treasury escrow account. The TARP loans were not repaid from money GM is earning selling cars, as GM and the Administration have claimed in their speeches, press releases and television commercials. When these criticisms were put to GM’s Vice Chairman Stephen Girsky in a television interview yesterday, he admitted that the criticisms were valid:

Question: Are you just paying the government back with government money?

Mr. Girsky: Well listen, that is in effect true, but a year ago nobody thought we’d be able to pay this back.

Girsky, you magnificent bastard! If you managed to say that line without laughing, you deserve all the unsold Pontiacs in North America.

Friday, April 23, 2010

The global financial system is again transfixed by sovereign debt risks. This evokes bad memories of defaults and near-defaults among emerging nations such as Argentina, Russia and Mexico. But the real issue is not whether Greece or another small country might fail. Instead, it is whether the credit standing and currency stability of the world’s biggest borrower, the US, will be jeopardised by its disastrous outlook on deficits and debt.

America’s fiscal picture is even worse than it looks. The non-partisan Congressional Budget Office just projected that over 10 years, cumulative deficits will reach $9,700bn and federal debt 90 per cent of gross domestic product – nearly equal to Italy’s. Global capital markets are unlikely to accept that credit erosion. If they revolt, as in 1979, ugly changes in fiscal and monetary policy will be imposed on Washington. More than Afghanistan or unemployment, this is President Barack Obama’s greatest vulnerability.

How bad is the outlook? The size of the federal debt will increase by nearly 250 per cent over 10 years, from $7,500bn to $20,000bn. Other than during the second world war, such a rise in indebtedness has not occurred since recordkeeping began in 1792. It is so rapid that, by 2020, the Treasury may borrow about $5,000bn per year to refinance maturing debt and raise new money; annual interest payments on those borrowings will exceed all domestic discretionary spending and rival the defence budget. Unfortunately, the healthcare bill has little positive budget impact in this period.

Why is this outlook dangerous? Because dollar interest rates would be so high as to choke private investment and global growth.

The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one. The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell. The spreads show all you need to know: a very clear and large contagion risk.

The five year Portuguese yields rose from 3.84% to 4.26%. The five year Spanish bonds rose from 2.89% to 3.03%, and the five year Irish bonds rose from 3.74% to 3.97%. These are not minor moves for investment gradesovereign bond funds. This kind of change means, for example (and roughly), you lose 0.5% on the value of a bond in one day. These are bonds that just pay 3% per year – and one such day may be enough to cause “investment grade investors” to decide not to stay involved and not to come back for a long while.

If these bonds transition towards being held by “emerging market investors” (usually quite different people), and stronger European commercial banks decide to limit their exposure to the weaker government’s bonds, we could be in for quite a major increase in yields across the spectrum.

Emerging market investors look at these weaker eurozone bonds – compared to say Argentina with 10% yields – and think they represent unappealing reward for the risk. Greek 5 year bonds rose to 9.4% yesterday from 8.1% the previous day. This is still low for a country on the verge of default.

These higher government bond yields are also hitting banks. No doubt there is a bank run on in Greece to some extent at the wholesale level. This will spread to other banks in the region. Since their marginal funding costs are tied to the creditworthiness of the sovereign, and since the collateral for these banks’ portfolios is tied to local property values and assets, these changes in sovereign yields will have a negative impact on banks’ balance sheets.

This country is in piles of debt. Projections for how much more we could load on in the coming decades are downright nightmarish. You think it's bad now?Just wait.

It's obvious that big changes are in store, but progress (or even the hope of it) is painfully absent. Eventually, Stein's law -- if something can't go on forever, it won't -- will prevail, and we'll be forced to fix the problem.

How we'll do so is the trillion-dollar question. There are only three ways to end runaway deficits: cut spending, raise taxes, or allow deliberate inflation.

The easy way outThe third option is often cited as the "tried and true" method, and not in a good way. Indebted countries habitually ask their reserve banks to run the printing presses at full bore. Governments can then pay their bills with the newly printed money, at the cost of inflation. This eliminates debt without forcing politicians to make unpopular decisions on spending and taxation, which is why it's so prevalent.

But the idea also has a growing chorus of non political supporters. As an MSN Money article published on Wednesday titled, "Why Inflation Would Be Good For Us," declares:

… a quick bout of higher-than-normal inflation would lower the nation's debt in real dollars, bailing the government out of the debt threat. That means we could avoid Draconian tax increases or big spending cuts, both of which would be politically unpopular and could scuttle the economic recovery.

Sounds neat! Too bad it's fantasy thinking.

The timing of this article was unfortunate. Just 18 hours after it was published, Fed chairman Ben Bernanke sat before the Joint Economic Committee, which asked him point blank about inflating away debt. His answer gets to the heart of the matter: "Given the structure of our debt, [inflation] wouldn't even help reduce the debt ... given that so many of our obligations are indexed."

Bingo. Inflating away debt only works when the obligations are in fixed dollar amounts, like a mortgage. But essentially, all of our long-term fiscal problems are entitlement commitments that grow (are "indexed") with inflation. When inflation rises, spending on Social Security and Medicare rise at the same rate. So the debt-inflation relationship is the opposite of the get-out-of-jail-free card some envision. Debt still goes up in real dollar terms, creating even more of a death spiral.

Fraud and potential criminal conduct were at the heart of the financial crisis.

Congresswoman Marcy Kaptur says that there was rampant fraud leading up to the crash (see this and this). TARP overseer Elizabeth Warrensuspects fraud as the cause of the crisis. Yves Smith has shown that fraud largely caused the subprime crisis. Janet Tavakoli says that rampant fraud and Ponzi schemes caused the financial crisis. According to economist Max Wolff:

The securitization process worked by "packag(ing), sell(ing), repack(aging) and resell(ing) mortages making what was a small housing bubble, a gigantic (one) and making what became an American financial problem very much a global" one by selling mortgage bundles worldwide "without full disclosure of the lack of underlying assets or risks." Buyers accepted them on good faith, failed in their due diligence, and rating agencies were negligent, even criminal, in overvaluing and endorsing junk assets that they knew were high-risk or toxic. "The whole process was corrupt at its core."

William Black - professor of economics and law, and former head of prosecution during the S&L crisis - says that massive fraud by is what caused this economic crisis. Specifically, he says that companies, auditors, rating agencies and regulators all committed fraud which helped blow the bubble and sowed the seeds of the inevitable crash. And see this.

Monday, April 19, 2010

It was late 2006, and an argument had broken out inside the Wall Street bank’s prized mortgage unit — a dispute that would reach all the way up to the executive suite.

One camp of traders was insisting that the American housing market was safe. Another thought it was poised for collapse.

Among those who saw disaster looming were an effusive young Frenchman, Fabrice P. Tourre, and his quiet colleague, Jonathan M. Egol, the mastermind behind a series of mortgage deals known as the Abacus investments.

Their elite mortgage unit is now at the center of allegations that Goldman and Mr. Tourre, 31, defrauded investors with one of those complex deals.

The Securities and Exchange Commission filed a civil fraud suit on Friday that essentially says that Goldman built the financial equivalent of a time bomb and then sold it to unwitting investors. Mr. Egol, 40, was not named in the S.E.C.’s suit.

Goldman has vowed to fight the S.E.C. But the allegations have left many on Wall Street wondering how far the investigation might spread inside Goldman and perhaps beyond.

Sunday, April 18, 2010

The global financial crisis, it is now clear, was caused not just by the bankers' colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday's announcement that the world's most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we've seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves.

Just consider the roll call beyond Goldman Sachs. In Ireland Sean FitzPatrick, the ex-chair of the Anglo Irish bank – a bank which looks after the Post Office's financial services – was arrested last month and questioned over alleged fraud. In Iceland last week a dossier assembled by its parliament on the Icelandic banks – huge lenders in Britain – was handed to its public prosecution service. A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters. In Switzerland UBS has been defending itself from the US's Inland Revenue Service for allegedly running 17,000 offshore accounts to evade tax. Be sure there are more revelations to come – except in saintly Britain.

Beneath the complexity, the charges are all rooted in the same phenomenon – deception. Somebody, somewhere, was knowingly fooled by banks and bankers – sometimes governments over tax, sometimes regulators and investors over the probity of balance sheets and profits and sometimes, as the Securities and Exchange Commission (SEC) says in Goldman's case, by creating a scheme to enrich one favoured investor at the expense of others – including, via RBS, the British taxpayer. Along the way there is a long list of so-called "entrepreneurs" and "innovators" who were offered loans that should never have been made. Lloyd Blankfein, Goldman's CEO, remarked only semi-ironically that his bank was doing God's work. He must wake up every day bitterly regretting the words ever emerged from his mouth.

This has many wondering if the whole SEC action against Goldman (which some have already pointed out is a rather weak case) is nothing but smoke and mirrors to distract the broader public for a few weeks until anger once again dies down while in the meantime the administration pushes this country deeper and deeper into insolvency. If it means sacrificing the SEC which, whose downfall is a given anyway, and will take a few years of legal wrangling and millions in legal fees charged to Goldman's shareholders, so be it. For those who care where the real news is, we direct your attention to today's Daily Treasury Statement, which disclosed that total US debt just jumped to $12.817 trillion, $51 billion higher on the day, $101 billion higher for the month of April, and $965 billion higher for the fiscal year beginning October 1, 2009 (so six months ago).

Friday, April 16, 2010

Washington, D.C., April 16, 2010 — The Securities and Exchange Commissiontoday charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”

Francesca Levy

Economic indicators in these metros have gone from bad to worse, with no sign of recovery.

Miami boasts a popular South Beach club scene, Art Deco Architecture, and perhaps the best Cuban food in the country. But residents don't have much else to celebrate.

More than three years after the economy started its downward slide, the Miami metro area, like a handful of Sun Belt cities, still hasn't begun to recover. Median home prices in Miamihave fallen 38% since its market peaked in the second quarter of 2007; the city's 11% unemployment rate is above the national average and has grown more than most of the 40 cities we surveyed.

Cities in the "Sand States" of Florida, California, Arizona and Nevada, where overbuilding was rampant, are also in trouble, claiming nine of the top 10 spots in our list of cities in free fall. In Las Vegas, Riverside, Calif., and Phoenix, median home prices have fallen 50%, 44% and 37% from their respective peaks. Jobs are vanishing. Though country-wide, employers added 162,00 jobs last month, Riverside gained 13% fewer jobs in February 2010 (the latest numbers available by metro) than it did the same month three years earlier. Tampa, Fla., saw a 10% drop, and Los Angeles added 9% fewer jobs over the same time period.

These cities are also slow to absorb their glut of unsold foreclosed homes, keeping recovery at bay.

"These were highly speculative housing markets," says Jonathan Miller, president of Miller Samuel, a Manhattan-based real estate appraisal firm. "In the markets that have unloaded a lot of foreclosed housing stock there's still a lot more coming."

Foreclosure activity in the U.S. real estate market increased by 7 percent in the first quarter of 2010, according to RealtyTrac's U.S. Foreclosure Market Report. Default notices, scheduled auctions and bank repossessions were reported on 932,234 properties in the first quarter. The pace of foreclosure activity seems to have increased through the three-month period ending March 31. The breakdown:

304,799 default notices

369,491 foreclosure auctions scheduled

257,944 bank repossessions (REOs)

"Banks are starting to wade through the backlog of troubled home loans at a faster pace," says AP's Alex Veiga.

Is this the kind of wading you can do with just hip boots? The "shadow inventory" -- the number of houses that are highly likely to come onto the market soon -- is as hard to pin down as its name implies. First American CoreLogic [pdf] puts the figure at 1.7 million units. Amherst Securities senior analyst Laurie Goodman estimated in congressional testimony [pdf] that there are closer to 7 million mortgages so dire that they will inevitably fail -- though Goodman made the case in December that "there will be one modification plan after another until a plan is successful." The latest HAMP report [pdf] offers more evidence that the number of unsalvageable mortgages is growing. (The shadow inventory estimates do not include good borrowers who will be selling in the near future.) Here's an estimate of 7.2 million delinquent mortgages as of January.

Thursday, April 15, 2010

More than three-quarters of homeowners who have had their monthly mortgage payments reduced under the Obama administration's primary foreclosure-prevention program owe more on their mortgage than their house is worth, according to a new report by government auditors.

Over half of the roughly 170,000 distressed borrowers who have gone through the program are seriously underwater, meaning they have negative equity of at least 25 percent, the report shows, citing data through February. In other words, for every $1.00 their home is worth, they owe at least $1.25.

The average homeowner that's received a five-year modified mortgage under the administration's plan had negative equity of about 35 percent prior to the program, according to a Wednesday report by the Congressional Oversight Panel, a federal bailout watchdog. After modification, that burden actually increased for the average homeowner, who is now underwater by more than 43 percent, according to the bailout watchdog's report. Research shows that the more under water homeowners are, the more likely they are to fall behind on payments, default, or walk away.

A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report.

RealtyTrac Inc. said Thursday that the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. In addition, households facing foreclosure grew 16 percent in the same period and 7 percent from the last three months of 2009.

More homes were taken over by banks and scheduled for a foreclosure sale than in any quarter going back to at least January 2005, when RealtyTrac began reporting the data, the firm said.

"We're right now on pace to see more than 1 million bank repossessions this year," said Rick Sharga, a RealtyTrac senior vice president.

Foreclosures began to ease last year as banks came under pressure from the Obama administration to modify home loans for troubled borrowers. In addition, some states enacted foreclosure moratoriums in hopes of giving homeowners behind in payments time to catch up. And in many cases, banks have had trouble coping with how to handle the glut of problem loans.

These factors have helped slow the pace of foreclosures, but now that trend appears to be reversing.

"We're finally seeing the banks start to process the inventory that has been in foreclosure, but delayed in processing," Sharga said. "We expect the pace to accelerate as the year goes on."

In all, more than 900,000 households, or one in every 138 homes, received a foreclosure-related notice, RealtyTrac said. The firm based in Irvine, Calif., tracks notices for defaults, scheduled home auctions and home repossessions.

Homeowners continue to fall behind on payments because they've lost their job or seen their mortgage payment rise due to an interest-rate reset. Many are unable to refinance because they now owe more on their loan than their home is worth.

The Obama administration's $75 billion foreclosure prevention program has only been able to help a small fraction of troubled homeowners.

Wednesday, April 14, 2010

We've seen lots of people using Google Buzz to share interesting links from around the web. To do so, you had to copy and paste the link from one browser window to another — there weren't buttons that made it easy to post to Google Buzz without leaving the site you're on.

Savvy sites like Mashable and TechCrunch quickly got creative and implemented their own Buzz buttons, using Google Reader as the backend. But not every site owner should have to hack together their own version of these buttons (and not everyone who uses Buzz also uses Reader), so this morning we're making copy-and-paste Buzz buttons available for anyone to use. Starting today, you'll see these buttons around the web on participating sites including: The Washington Post, The Huffington Post, Glamour, YouTube, Blogger, MySpace, GigaOM, PBS Parents, PBS NewsHour, The Next Web, TweetDeck, SocialWok, Disqus, Vinehub, and Buzzzy. Mashable and TechCrunch have updated their sites to use these new buttons too.

Monday, April 12, 2010

In a new report, the Bank for International Settlements (BIS) - often called the "central banks' central bank" - points out that bond investors are not as smart as they think, that Western debt is much higher than officially reported (since contingent liabilities and pension debts are excluded from official numbers), and that the recovery of the world economy may be crushed by fiscal problems.

The report states:

According to the OECD, total industrialised country public sector debt is now expected to exceed 100% of GDP in 2011 – something that has never happened before in peacetime. As bad as these fiscal problems may appear, relying solely on these official figures is almost certainly very misleading. Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody’s guess. As far as we know, there is no definite and comprehensive account of the unfunded, contingent liabilities that governments currently have accumulated.

Sunday, April 11, 2010

Lawmakers from both parties are attacking a White House proposal that would grant the federal government sweeping powers to wind down financial firms – an authority one Democrat derided as “TARP on steroids.”

With Treasury Secretary Timothy Geithner listening in a House hearing room, bailout-weary lawmakers are spending Thursday morning picking apart a proposal by Rep. Barney Frank (D-Mass.) that seeks to grant this “resolution authority” to the government, similar to the authority the Federal Deposit Insurance Corp. has over U.S. banks that become insolvent.

“Let’s not adopt ‘TARP on steroids,’” Rep. Brad Sherman (D-Calif.) said in a release before the hearing started.

Rep. Luis Gutierrez (D-Ill.) slammed the bill’s proposal that when the government has to front money to cover the costs of winding down a dying firm, other big financial firms will pay the bill via a fee assessed after the fact.

Gutierrez argued that the firms should pay into a fund, “Now, today, not after the fact.”

“They should pay for future insurance policy payouts. The fund should be set up just in case their behavior … raises its ugly head again,” he said.

Rep. Spencer Bachus of Alabama, the ranking Republican on the committee, complained that Frank released the draft text Tuesday afternoon, less than 48 hours before the hearing, giving neither members nor witnesses enough time to digest its contents.